The Sellers’ Market for Startup Investing will Restart in ~12 Months

Silicon Valley has been painfully instructive in the last month. It’s now clear that many bloggers are no better than the MSM in terms of “If it bleeds, it leads.” As a community, web startups need leadership, focus, and goals. To hear that message from one of the big names in venture capital, apparently one needs to fly to New York. Instead, the Valley is delivering grimy voyeurism from ‘A-list bloggers’ or transient opportunism from VCs seeking to negotiate better inside deals with their portfolio companies over the next six months.

We are certainly in a Buyers’ Market for startup equity right now, but it will end predictably. It will end so predictably that I’m going to the crazy thing and make a specific prediction in writing. To wit,
Without additional, catastrophic interference, early-stage startups will start to enjoy a Sellers’ Market with angel investors and VCs by the middle of Q4 2009. In other words, the combination of the natural maturation and consolidation of Web2 and the current banking crisis will only cause a one-year “winter.”

I’m clearly guessing — but not without basis.

Calling the Top

Starting in late 2004, I was running around telling people to be out of the markets and in cash by March 2008. My specific reasoning was “about six months before the Republican National Convention,” which was at least as wrong as it was right. I simply figured that the GOP would stop at nothing to stay in office [√], and the Republicans usually persecute bit-driven businesses like IT and Entertainment in favor of atom-driven businesses like Autos, Telecom services, and Petrochemical.

My more general reasoning was that IT boom-and-bust cycles have been between 8 to 11 years long since the early 1960s. March 2008 was exactly 8 years from the top of the last IT cycle, i.e. the DotCom boom. However, this cycle was marginally the shortest ever, and I called the Web2 Top w_a_y too close for my own comfort.

I don’t believe in exact market timing and was hoping my March 2008 deadline was a bit before the Top, but it was actually after. GOOG and NASDAQ both hit their highs around November 1, 2007, and the Bebo-AOL deal was announced on March 13, 2008. That deal felt late and overpriced at the time, and it probably still will with the passage of time.

Calling the Bottom

Nobody seems to remember it well, but the dotcom community was clearly climbing out of its Bust in Q3 2001, less than 18 months after the DotCom Top. Wi-Fi and blogging, the harbingers of Web2, were well into their early adopter phase. That quarter, Oren Michels and I launched WiFinder on stage at Demo. We got off to a great start PR-wise too, largely by pitching Glenn Fleischman and the bloggers who already owned the public discourse on Wi-Fi.

Of course, WiFinder launched September 5, 2001, six days before the world-beyond-tech shut down for a while. Even that extension into “nuclear winter” as people call it, was eighteen months or less. Friendster launched March 2002 and the first bulge of Web2 startups had been founded by spring 2003 and had little trouble finding angel investment. O’Reilly coined the term “Web2” in Spring 2004 to describe what he saw as an existent, emerging sector.

Large shocks extend the tech down cycle, but not for very long. 9/11 extended the post-dotcom Buyers’ Market by eighteen months. I’m betting the banking-shock extension is twelve. The Top was almost exactly a year ago, and Sellers’ Market start to re-emerge around this time next year.

Separating the Cycles

Any number of credible people will make the above statements, but then they come to very different conclusions. In these panicky times, many experts are unnecessarily and unreasonably conflating unlike economic cycles. When you make that error, it looks like web startups will take as long to recover as global banking. That’s not the way it works.

IT startups don’t run on credit, and they don’t correlate directly the GDP. IT startup recovery leads GDP recovery significantly. We don’t behave like big tech companies such as GOOG, YHOO, ORCL, MSFT, etc. who need to care a lot about the state of the overall economy. Their revenue is driven by big corporate spending. Ours normally isn’t. That’s one of the reasons the big guys are late to the pick up the latest technologies. Two guys in a garage with a new way to share music, or even startups at Twitter’s scale, don’t care at all. Facebook and Automattic, where I have a few shares, are in an interesting middle-state from this point of view. If they manage the transition a tenth as well as Google did during the Dotcom Bust, they will be huge wins.

The Buyers’ Market for startup equity is never more than a quarter of the overall cycle, and it’s normally more like a sixth. Early-stage investors won’t wait for the economy or housing or banking to recover. A bunch of rich people are frantic right now because their personal portfolios are getting hit. However, pretty soon they’ll remember that those portfolios only exist because they paid a startup to give away web-based email, sold AKAM at $300/share or some other highly speculative IT-investing activity.

At that moment, they’ll move back from fear to greed and start competing with each other to speculate — on us.